BI holds rate steady before new scheme takes effect in August

Bank Indonesia (BI) is keeping its key rate unchanged as it gears up to implement a new scheme in August.

The central bank announced on Thursday its decision to maintain its benchmark interest rate at 6.5 percent. Both deposit and lending facilities also remain unchanged at 4.5 percent and 7 percent, respectively.

The move surprised many analysts, who expected to see a fifth rate cut this year. BI has so far slashed its rate by a total of 100 basis points (bps) from 7.5 percent.

In a statement, BI claims that its previous monetary easing moves and macroprudential measures will continue to promote economic growth, signaling that the easing was sufficient for now.

Thursday's announcement was the last before BI proceeds with the implementation of its new policy rate—the seven-day reverse repo rate—on Aug. 19. At present, the reverse repo rate stands at 5.25 percent, lower than the current rate that is based on the 12-month BI certificate (SBI).

BI economic and monetary policy executive director Juda Agung said it had coordinated with the banking industry and it expected no hassles to occur during the new scheme's implementation.

"If we maintain the same stance as we do now, the [seven-day reverse repo] rate will stay the same. If we decide on an easing later, the rate will come down."

According to BI, the current economic situation remains in check with the inflation rate hovering at around 3.45 percent year-on-year, which is within its target band of 3 to 5 percent for the whole of 2016.

However, it acknowledges that credit growth is still limited and the banking industry needs time to keep up with its easing stance. Lending only expanded by 8.3 percent year-on-year in May, climbing slightly from 8 percent yoy in April, as revealed by the latest banking statistics.

BI projects to see an improvement in bank loans with an estimated annual growth rate of 8.9 percent in June.

Standard Chartere d Bank Indonesia economist Aldian Taloputra said BI was in wait-and-see mode, citing second-quarter growth data that might not come as strong as expected. The Central Statistics Agency (BPS) will announce the second-quarter results in August.

"BI wants to keep its ammunition," Aldian said by phone. He predicted that BI would also watch the private sector's response to its new rate and the government's tax amnesty program.

OCBC economist Wellian Wiranto was of the view that BI took a prudent step by holding the rates.

"In taking a more cautious approach to rate cuts, BI must also be cognizant of the fact that even if there remains space to move, it is not infinite. Even as inflation has stayed relatively subdued in recent months, it is still prone to upticks caused by idiosyncratic factors, such as the risk of higher food and fuel prices in particular," he wrote in a research note.

Aldian and Wellian projected a rate cut would occur in September af ter the new scheme took effect.

Singapore-based UOB foresees one more 25 bps cut in August or September. In a research note, it says it believes BI can also further reduce the banks' reserve requirement ratio (RRR).

—JP/ Prima Wirayani

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Source: BI holds rate steady before new scheme takes effect in August